How to prevent fraud

Prevention is better than cure – would seem to make sense in the case of fraud as it is in the case of your health. Fraud can cause a company to lose a great deal of money, or worse collapse completely. A company collapse due to fraud can be avoided by putting in a few measures that would greatly reduce the risk of fraud can cost far less than this.

The first step to take is for a company to accept that it is at risk from fraud and the attention of the fraudster. Many organisations fail to even accept this, then are surprised to find a black hole in their finances of several £100,000s. They do not believe that any of their trusted staff could be a fraudster. Accepting that fraud is a very real risk is the first stage – deciding that fraud is not acceptable is the next.

A company must tell all its staff, and often customers and suppliers as well, that it does not tollerate fraud. This is the fraud policy. It can be set out in a document which is circulated to all staff. Big corporations will publish a glossy booklet, a small business can photocopy a simple typed page. The important point is to communicate that fraud is not accepted and if discovered, action will be taken. This in itself can have the effect of greatly reducing the risk of fraud happening.

The next critical step in preventing fraud is to ensure that any previous complacency does not creep back in. This means that all systems are reviewed on a regular basis for weaknesses to fraud. Auditors often review accounting controls once a year at the annual audit – this is not enough nor is it frequent enough. Accounting controls designed to keep a financial reporting system working well are not designed for preventing the determined fraudster. For example a control that requires two signatures on a document can easily be circumvented by collusion.

By understanding how an accounting control can be circumvented efficient measures can be introduced to ensure that the risk of this happening is low, and if it should, it will be discovered sooner rather than later. This takes a different mindset to that of an auditor, that of a fraud expert, such as a forensic accountant or fraud investigator is of course ideal.